Strength in diversity

Although gold has been somewhat volatile of late, longstanding Members will know that we are overtly bullish on prices over the longer term. Since our inception seven years ago,, we have recommended a significant number of gold stocks in Australia, the United Kingdom and the United States. We believe that gold is in a primary bull market and that prices will rise into the thousands in due course.

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"When one door closes, another one opens and gold should benefit from a devaluing dollar."

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Underpinning this opinion is a long held belief that inflation is now making a comeback in the global financial system. While consumer prices are yet to pose a problem In the United States, we believe inflationary forces are already well entrenched.

Asset prices have risen considerably in recent years. Only last week, a record price of more than $100 million dollars was paid for a vacant lot of a few hectares in the Hamptons. While there can be no doubt that the cost of housing has soared over the past ten years, we believe it is only a matter of time before the cost of living, as reflected in consumer prices, plays catch up.

This week, the big development in financial markets was that interest rates are now rising (see this week's article on bond prices), and in our opinion, this is direct evidence that inflation is now making a comeback.

Inflation and gold prices have always been inextricably linked, in that they both move in the same direction. In the last few thousand years, gold has always been viewed as the ultimate hard currency. Demand for the precious metal rises significantly during times of inflation. Given our view that inflation is returning to the economy, we anticipate that demand for gold will soar in the next few years.

One vehicle that we believe provides Members with effective exposure to the gold price is the Van Eck Gold Miners Exchange Traded Fund (AMEX, GDX). Listed on the American Stock Exchange, the Fund has a diversified exposure to bullion through investments in some of North America's largest gold stocks.

Established in May 2006, the ETF replicates the performance (before fees and expenses) of the Amex Gold Miners Index. As such, GDX provides broad exposure to a number of high quality gold producers and explorers.

As a passive Fund, Van Eck seeks to not outperform, but to duplicate the Gold Miners index. Van Eck Associates, the Fund's distributor, has been a successful money manager in the US since 1955. But being an index tracker, costs are relevant, and GDX meets the mark on this front, with a low expense ratio of 0.55 percent.

The underlying benchmark fulfils our objective in gaining exposure to the gold price in that the index is comprised of a high quality collection of companies. Gold producers are leveraged to the bull market in gold, since profits increase rapidly when gold prices rise.

The AMEX Gold Miners index comprises the broadest range of companies in any of the world's gold mining indices. There are currently 39 constituents in all, each with a market capitalization of greater than $100 million.

The ten largest company holdings in the Fund as at 8 June were:-

Barrick Gold Corp	16.14%	North America
Newmont Mining	12.00%	North America
AngloGold Ashanti	7.72%	South Africa
Goldcorp	6.74%	North America
Gold Fields	5.95%	South Africa
Compania de Minas Buenaventura	4.7%	Peru
Harmony Gold Mining Co	4.61%	North America
Kinross Gold	4.55%	North America
Yamana Gold	4.38%	South America
Agnico Eagle Mines	4.32%	North America

The first four holdings are companies held within the Fat Prophets Portfolio. Within the ETF we predict that there are also a number of other high quality, well reserved gold producers with producing mines located around the world.

Members will also know that we are bearish in our outlook for the US dollar. We expect the greenback to continue devaluing over time due to reckless spending, substantial trade and budget deficits, a huge national debt and excessive money printing. History has shown that a currency which lacks any fundamental supply control is bound to lose value.

We believe this to be the situation the dollar faces today. When one door closes, another one opens. Thus, gold should benefit from a devaluing dollar.

First recommended at $37.20 in January (FAT49), GDX has continued to consolidate within a range between the all-time high of $43.32 and support at $36.19. While we anticipate further consolidation within this range, we believe GDX will outperform over the medium to longer term if our view on a higher gold price materializes.

However, we remain cautious on gold in the near term. The gold price recently broke down through an eight month rising channel to trade at $652 an ounce. So far, gold's attempt to rebound into this channel has failed, and so we foresee further corrective action as a distinct possibility.

While this price action suggests gold may move below $652, we anticipate that this will prove to be nothing more than a temporary setback within a longer-term bull market. In the event that gold does test lower levels, we believe support at $632.80 and $605 respectively, will be the full extent of the correction.

It is our view that in time, gold's long-term upward momentum will prevail and that price will advance well beyond the 27-year high of $730.40. We anticipate corresponding gains in GDX over the medium to longer term and expect to see the Fund breaking above $43.32 to achieve new all-time highs.

Accordingly, GDX continues to be held in the Fat Prophets Portfolio and we will closely monitor the price action for suitable buying opportunities.